Banking crisis prompts US firms to rethink FX policies

A new report has revealed that many corporates in North America are looking to diversify their FX counterparties after the recent banking crisis highlighted the potential risks associated with having only one or two banking partners.

The report carried out by Censuswide for MillTechFX, found that 88 per cent are exploring diversifying their FX counterparties after the banking crisis at Silicon Valley Bank, Credit Suisse, First Republic Bank and Signature Bank.

The crisis highlighted that a bank’s failure is said to cause serious short-term liquidity issues which can affect vital expenditure such as payroll and supplier invoices, even if it’s only for a few days.

Managing currency exposures is also at the top of any corporate priority list with 68 per cent experiencing increased risk as a result of US dollar volatility.  Over four-fifths of companies already have a hedging program in place, and out of the 19per cent that do not, 69 per cent are considering doing so given market volatility.

The average hedge ratio was 60-69 per cent, and nearly eight out of ten  cited their hedge ratio as higher compared to this time last year. The vast majority said the cost of hedging had increased in the past year.

Despite the existence of tech-enabled FX solutions, many corporates are still relying on manual processes, phone calls and emails to transact in FX

Looking ahead, half of those surveyed plan on increasing their hedge ratio over the next 12 months, while 43 per sent plan on lengthening their hedge window.

Other notable findings involved the persistence of legacy systems, time-consuming processes, barriers to best execution, automation and the rising importance of ESG.

MillTechFX CEO Eric Huttman, said: “The recent banking crisis has acted as a wake-up call for the industry and it’s positive to see corporates looking to diversify their counterparties to enhance their risk management. This has the added benefit of providing them with the ability to compare prices, aiding transparency and enabling best execution.

“The combination of currency market swings and a difficult macro environment has created uncertainty for CFOs who are now prioritising risk management. Our research shows that in FX this has led to corporates hedging more of their risk, whilst also prioritising transparency and high-credit quality counterparties.

“Despite the existence of tech-enabled FX solutions, many corporates are still relying on manual processes, phone calls and emails to transact in FX. This can be both extremely inefficient and a huge drain on time and resources. It’s clear corporates are starting to move away from this model and are increasingly exploring tech-enabled, automated solutions.”

For more, read the full report here.